The number of documents used in a property mortgage transaction depends on the nature of the mortgage, the mortgage amount, and the number of properties to be mortgaged.
In most residential transactions, a single mortgage deed in the lender’s standard format is sufficient. This deed includes standard terms and conditions; in the case of building society, rules applicable to members shall be included. Usually, the lender provides a printed mortgage form that the conveyancing solicitor will have to fill. Sometimes, the lender may ask the borrower to fill the CH1 Form produced by the Land Registry for registered land, or a mortgage deed that is drafted by the solicitors acting for the lender.
With respect to loans for commercial property, there may be a loan agreement along with the legal mortgage or debenture incorporating the charge. While the banking section of the firm arranges for loan agreement, the charge documents are arranged by the conveyancers of the firm.
Irrespective of the fact that the loan is for residential or commercial purposes, the mortgage documentation has the following common aspects:
- It sets out details regarding commercial aspects, i.e. the purpose of the loan, the date on which it shall be repaid, the amount borrowed, the rate of interest at which the amount is borrowed, and (if applicable) facts about the borrower being allowed to redeem the mortgage early.
- The property to be purchased is usually kept as security for the loan. This is preferred to an equitable mortgage because of the legal options that are available as remedy in case the borrower fails to repay; the law of equitable mortgage are not as flexible as the former. By way of a legal mortgage, a legal interest is formed in the property in favour of the lender to a term that is equivalent to a 3000 year old lease. And in the case of a leasehold property, such an interest is formed for a period that is one day less than the lease.
- Details about the documents of the property.
- The lender may sometimes be granted additional security such as plant & machinery, access to rental income, fixed charge over fixtures etc.
- When the borrower is a company, it is common for lenders to insist on a floating charge on the assets that are not covered by other security. Such charges include most types of assets including stock-in-trade, goodwill and book debts etc. These assets would be impossible to be charged a fixed charge, and also gives the borrower the convenience of disposing them. Assets that are created after the date on which the floating charge was created, and fall within an indentified group of assets shall also be subject to the charge.
And if the borrower were to declare bankruptcy, the lender who holds the floating charge can appoint an administrator. Such an administrator can be appointed without an order of the court. Also, the lender can insist that the said person be appointed by him, rather than someone appointed by directors or other creditors.
- Liabilities owed by the borrower to the lender with respect to the security are also discussed. Sometimes, an ‘all monies charge’ is formed with respect to not just this loan but all loans owed by the borrower. Thus, when a borrower is declared insolvent, the lender can use the proceeds of the sale from the property to settle all debts owed by the borrower.
- All internal consents, approvals, and representations regarding his status shall also be submitted by the borrower. For instance, the borrower may have to make representation that he is solvent etc.
- The borrower will also have to make a declaration that he shall not do or shall not omit to do things that would devalue the property or his own status. For instance, he may have to enter into a covenant with the lender that the property shall be kept in good condition, so as to not invalidate the insurance on the property.
- Events that shall cause the borrower to default on the loan, the events that shall cause the lender to cancel the loan shall also be discussed. Events that would lead to default of payment would include failure of the borrower to make payment of the principal amount, or the interest, or a breach of representation. Besides these, a breach of warranty, a breach of warranty or covenants (financial or property) or insolvency of the lawyer shall also be considered as a default.
- It shall also include details about consolidation. Thus, the lender can refuse the release of a mortgage unless loans secured on the borrower’s other properties have been repaid.
- Details of the negative pledge are also discussed. Thus, the borrower shall not be allowed to create a further mortgage on the same property or shall be allowed to do so, subject to the approval and control of the lender. This is done to prevent the borrower from borrowing more money which might make it difficult for him to repay the first loan. Besides, it is also possible that the lender may at a future date lend some more money to the borrower on the same property, and he may want to make sure that the money is secured by the first mortgage notwithstanding the creation of subsequent mortgages. This is called tacking and usually not preferred. When the lender has taken a floating charge, the negative pledge protects the floating charge. It is well known that a properly registered as first mortgage gives it priority over other subsequent mortgages. Subsequent mortgages shall gain priority over a floating charge, provided that the subsequent lender had knowledge of the negative pledge. If he did not notice the negative pledge, the new lender’s loan shall rank behind the floating charge, although the security is valid. This is an effective method to prevent subsequent mortgages gaining priority over the first lender’s floating charge. Also, when the borrower severs the negative pledge, the lender can cancel the loan and demand immediate repayment.
It is the duty of the borrower’s conveyancing solicitor to explain to the client, the aspects mentioned above and also explain the consequences of a breach of any or all of these aspects. This is especially true in the case of residential transactions where the borrower needs to be explained about the guarantees made by the borrower, the events that may lead to a default, and the power of the lender in such a default. Most residential borrowers, especially first timers are not really aware of these aspects; hence it is very important that they should be explained, but without frightening them. In this regard, he can also make enquiries if the borrower is aware of the liabilities that may arise with respect to the EMI, insurance premiums, etc, and that these liabilities are not likely to cause an unreasonable strain on the client’s financials.
Photo courtesy: Cameron Parkins